On April 26,2018 Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG), the leading global biotech company focused on rare diseases, reported unaudited results for the three months ended March 31, 2018 (Press release, Shire, APR 26, 2018, View Source [SID1234525749]).
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Flemming Ornskov, M.D., M.P.H., Shire Chief Executive Officer, commented:
"Shire is off to a good start in 2018 delivering on our key priorities of commercial execution, pipeline progression, debt pay down, and portfolio optimization. We generated product sales growth of 7% in the first quarter reaching $3.6 billion with important contributions from our Immunology franchise, recently-launched products, and international markets. We delivered $1.0 billion in net operating cash flow allowing us to remain on track towards our debt pay down target.
"We continue to advance our innovative pipeline with seven programs in registration including lanadelumab, the first monoclonal antibody being evaluated to prevent hereditary angioedema attacks, with the potential to change the treatment paradigm for this serious and sometimes life threatening rare disease.
"As part of the ongoing review of our portfolio, we recently announced an agreement for the sale of our Oncology franchise for $2.4 billion allowing us to unlock embedded value and sharpen our focus."
Product and Pipeline Highlights
Regulatory updates
Advanced lanadelumab with accelerated approval pathways underway in the U.S. (PDUFA date of August 26, 2018), Europe, and Canada.
Gained FDA acceptance for additional key filings: CINRYZE sBLA for pediatric use, including Priority Review; prucalopride NDA; and Calaspargase Pegol BLA.
Achieved marketing approval of XIIDRA (lifitegrast ophthalmic solution 5%) in Canada and ADYNOVI in E.U.
Obtained Breakthrough Therapy Designation for maribavir for cytomegalovirus (CMV) infection in transplant patients from FDA.
Clinical and business development updates
Agreed to divest Oncology franchise to Servier S.A.S. for $2.4 billion.
Formed pre-clinical research collaboration to evaluate a potential enzyme replacement therapy using NanoMedSyn’s proprietary synthetic derivatives.
1) The Non GAAP financial measures included within this release are explained on pages 26 – 27, and are reconciled to the most directly comparable financial measures prepared in accordance with U.S. GAAP on pages 20 – 22.
(2) In 2018, Shire created two business segments: a Rare Disease division and a Neuroscience division. As a result, Shire now reports its financial results based on these new segments. Segment contribution margin represents total revenue less cost of sales, direct R&D, and direct selling and marketing expenses. Segment contribution margin percentage represents segment contribution margin as a percentage of segment revenue. For further information, refer to Note 3: Segment reporting on page 19.
(3) Diluted weighted average number of ordinary shares of 912.1 million.
(4) Percentage point change (ppc).
(5) Calculated as a percentage of total revenues.
Product sales growth
Achieved product sales growth of 10% in our Rare Disease division, with increases across all franchises on a reported basis, driven by Immunology, Hematology, Internal Medicine, and Ophthalmics.
Delivered growth of recently launched products of 77%, primarily due to ADYNOVATE, CUVITRU, and GATTEX, as well as XIIDRA with script growth of 27% since Q1 2017.
Experienced decline of 2% in product sales in our Neuroscience division due to the genericization of LIALDA in the second half of 2017. Excluding the impact of LIALDA, Neuroscience grew 12%, primarily driven by VYVANSE.
Operating performance
Generated Non GAAP diluted earnings per ADS of $3.86, an increase of 6%, as Q1 2018 benefited from higher product sales and a lower tax rate, which were partially offset by lower gross margins due to Q1 2017 favorability from the timing of changes in the costs to manufacture certain products.
Reported Non GAAP EBITDA margin of 43%, a slight decline from Q1 2017, with continued benefit from operating efficiencies in SG&A offset by lower gross margins as discussed above.
Rare Disease reported contribution margin of $1,367 million, or 48%, and Neuroscience reported contribution margin of $770 million, or 82%.
Strong cash flow
Strong free cash flow enabled an $866 million reduction in Non GAAP net debt during the quarter.
FINANCIAL SUMMARY – FIRST QUARTER 2018 COMPARED TO FIRST QUARTER 2017
Revenues
Delivered total revenues of $3,766 million representing growth of 5%.
Rare Disease product sales increased 10% to $2,719 million (Q1 2017: $2,472 million), with growth across all franchises on a reported basis and growth from recently launched products. Rare Disease product sales also benefited from favorable foreign currency exchange in our international markets.
Neuroscience product sales decreased 2% to $918 million (Q1 2017: $940 million), due to the launch of generic competition for LIALDA in the second half of 2017. Excluding the impact from LIALDA, Neuroscience product sales grew 12%.
Royalties and other revenues decreased 20% to $129 million (Q1 2017: $160 million), primarily due to the reclassification of ADDERALL XR from royalty revenue to product sales and other accounting changes as required under the new revenue accounting standard as well as lower SENSIPAR royalties.
Operating results
Rare Disease contribution margin percentage was approximately 48% (Q1 2017: 51%), a slight decline from the prior year due to lower gross margins on sales, partially offset by lower selling and marketing costs.
Neuroscience contribution margin percentage was flat at 82% (Q1 2017: 82%), as the decline in sales due to LIALDA was offset by lower costs.
Operating income increased 40% to $694 million (Q1 2017: $497 million), primarily due to lower expense related to the unwind of inventory fair value adjustments, partially offset by higher amortization of acquired intangible assets and integration and acquisition costs.
Non GAAP operating income increased 1% to $1,467 million (Q1 2017: $1,454 million), with the benefit of our on-going cost reduction initiatives and operating synergies offset by lower gross margins as Q1 2017 reflected favorability from the timing of changes in the costs to manufacture certain products.
Non GAAP EBITDA margin was slightly down to 43% (Q1 2017: 44%), primarily due to the lower gross margin referred to above offset by ongoing cost reduction initiatives and operating expense synergies.
Earnings per share (EPS)
Diluted earnings per American Depository Share (ADS) increased 47% to $1.81 (Q1 2017: 1.23). The increase was primarily driven by operating income as noted above, combined with lower expense related to the unwind of inventory fair value adjustments.
Non GAAP diluted earnings per ADS increased 6% to $3.86 (Q1 2017: 3.63) as Q1 2018 benefited from higher product sales and a lower tax rate partially offset by a lower gross margin.
Cash flows
Net cash provided by operating activities increased 120% to $1,010 million (Q1 2017: $459 million), driven by improvements in working capital, higher operating profitability, and a favorable comparison period as the Q1 2017 period included a payment of $346 million associated with the settlement of the DERMAGRAFT litigation.
Non GAAP free cash flow increased 272% to $918 million (Q1 2017: $247 million), primarily due to the growth in net cash provided by operating activities noted above and a decrease in capital expenditures.
Debt
Non GAAP net debt as of March 31, 2018 decreased $866 million since December 31, 2017, to $18,203 million (December 31, 2017: $19,069 million). A combination of Shire’s Non GAAP free cash flow and existing cash balances were utilized to repay debt during the quarter. Non GAAP net debt represents aggregate long and short term borrowings of $18,172 million, and capital leases of $350 million, partially offset by cash and cash equivalents of $318 million.
OUTLOOK
Our 2018 guidance, which continues to include our Oncology franchise, remains unchanged. It will be updated to remove the Oncology franchise upon the close of this pending sale later this year. Similarly, our 2020 guidance remains unchanged and will be updated to remove the Oncology franchise upon the close of this pending sale later this year.
The Non GAAP diluted earnings per ADS forecast assumes a weighted average number of 915 million fully diluted ordinary shares outstanding for 2018.
Our U.S. GAAP diluted earnings per ADS outlook reflects anticipated amortization, integration, and reorganization costs.
Risks associated with this outlook include the potential uncertainty resulting from the announcement by Takeda Pharmaceutical Company Limited that it is considering making a possible offer for Shire.